Sebi for parity in disclosures

OUR SPECIAL CORRESPONDENT

Mumbai, Aug. 19: Disclosure rules for listed companies will soon be tightened, making it mandatory for entities to release material and price sensitive information on the local bourses at the same time that they make a filing with an overseas exchange.

The “parity in disclosure” rule will make sure companies do not get away with asymmetric disclosure of material information to different classes of investors.

A discussion paper floated today by the Securities and Exchange Board of India (Sebi) said the current disclosure rules were framed in 1998 and needed to be reviewed because of disparities of disclosure stemming from “liberal interpretations on what constitutes materiality”.

At present, clause 36 of the equity listing agreement between bourses and listed entities describes only seven broad categories of material events that need to be disclosed to the bourses and Sebi felt that the list needed to be fleshed out to ensure a steady stream of disclosures “to enable investors to make informed decisions”.

The need for a review arose after market participants increasingly felt that the current clause 36 gave too much discretion to the listed entities to determine whether an event would have a “material bearing on the performance of the entity” and whether a particular information was price sensitive.

While drawing up an elaborate list of 16 categories of material and price sensitive events, Sebi also defined certain quantitative and qualitative criteria to determine materiality and prescribed two litmus tests — a price impact test and a reasonable investor test — to determine whether any information was price sensitive.

One of the biggest changes proposed is that companies would need to intimate exchanges within 15 minutes of the end of its board of directors meeting if they took any decision on the payout of dividends, cash bonus, buyback of shares, fund raising initiatives, issue of bonus shares, re-issue of forfeited shares, any other alteration in capital, including calls, financial results, and voluntary delisting.

The quantitative criteria refers to an event where the value involved or the impact exceeds 5 per cent of the gross turnover or revenue or total income or exceeds 20 per cent of the net worth. This threshold will be determined on the basis of audited consolidated financial statements of the last audited financial year.

The qualitative criteria will become applicable to an event or information if its omission is likely to result in a discontinuity of information or in significant market reaction if the omission came to light at a later date.

Some of the fresh additions to existing requirements include making it mandatory for listed companies to announce any family settlement agreements, material frauds by directors/employees of the company, grant or withdrawal of a licence.

According to the paper, a listed company should explain and give reason for change in key managerial personnel, including in instances of resignation. In case of appointment of a director, the company is also required to disclose relationships between directors (if any) within one day of appointment.

Under the indicative list of material and price sensitive information, the discussion paper has mentioned various activities, including commencement or postponement of commercial operations, change in general character of existing business, strategic arrangements and de-mergers.

In case of restructuring, the company has to provide details and reasons as well as the overall impact to the exchanges.

Listed companies should also disclose details about product launch, capacity addition and awarding of contracts, among others.

The discussion paper also suggested that companies will also have to disclose information which is “exclusively” known to it and which may be necessary to help investors of the listed entity assess its position. It, however, did not elaborate on whether this exclusive information would apply to strategic moves such as acquisition talks.

Sebi suggested that listed companies would have to inform bourses about all events which are material in nature, price sensitive and have a bearing on overall business performance. These disclosures need to be made within a day from the occurrence of the event and it also includes information on unlisted subsidiaries.

ROAD TO MORE CLARITY

BROAD GUIDELINES

● Entities to release material and price sensitive information on local bourses when they make a filing with an
overseas exchange

● New list has 16 categories of such events that need to be reported
instead of the current seven

CRITERIA FOR DISCLOSURE

● Certain quantitative and qualitative criteria will determine materiality and two litmus tests — a price impact test and a reasonable investor test — to determine whether any information is price sensitive

MAJOR CHANGES

● Any decision on dividend payout, cash bonus, buyback of shares, fund raising initiatives, issue of bonus shares, re-issue of forfeited shares, alteration in capital including calls,
financial results and voluntary delisting to be reported within 15 minutes of board meet
lAny family settlement agreements, material frauds by directors/employees to be reported